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Sound Advice: May 12, 2021

Is It Time To Get Nervous?

Six months and counting since the November election and it appears that the recent market euphoria may be beginning to fade. Expectations of a more robust pace of business activity are one thing, but the advance in stock prices seems to be discounting gains rather far into the future.

With that said, however, rich valuations alone generally are not the triggers for market retrenchments.  Invariably, it’s shocks such as interest rate hikes or negative economic developments that start to blacken the picture.

In April, consumer confidence rose to one of the highest levels of the past 50 years and is hovering below the short-lasting peaks of the dot-com era of two decades ago.  That optimism is at least partially justified by the still-high savings rate and the probable pickup in spending that it will eventually engender. 

The improved outlook is also a reflection of hopes for further gains in the market, which has staged an extraordinary bounceback from the near-knockout of early 2020.  Whether these hopes will be fulfilled is another story.

Every year, Wall Street analysts crank out their earnings estimates for the next 12 months. With rare exception, the numbers start on the optimistic side and then get pared back over the course of the year. So here we are again with yet another vote of confidence from the "pros", but the odds are that this year's pattern of revisions will follow those of the past. 

At a minimum, this perspective will trigger the thought of reducing one's risk quotient while pondering the economic developments that lie ahead. Although there are divergent views of where things stand now, few make much sense. Focusing primarily on the U.S. because international markets are still roiled ignores the fact that U.S. valuations are stretched enough to raise an eyebrow.

The same goes for concern about the impact of rising interest rates on fixed-income securities. And so on. Investing in the U.S. market because other opportunities are less compelling pays no attention to where valuations are today. This is one of the times when there is increased reason to be more cautious while awaiting information that may strengthen the confidence in making or adding to commitments. What is unwise is the belief that you should never take a breather. 

N. Russell Wayne, CFP®

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